Atlanta-based SunTrust hopes to expand its presence in the Carolinas, which is Wachovia's home base. SunTrust Chairman L. Phillip Humann said he was appealing to Wachovia's board of directors after the company quashed a preliminary merger agreement the two banks reached in December. In April, Wachovia accepted a different offer from First Union (FTU: up $0.56 to $30.58, Research, Estimates)

"We made our proposal with honesty mixed with a certain degree of irony because we were supposed to be here in this very room on Monday, Dec. 18, 2000," Humann told analysts during a telephone conference Monday. "We didn't understand that then (First Union agreement), and don't to this day. We were perplexed and honestly dumbfounded to hear about the inferior First Union offer."

Wachovia's board will meet in the near future to review SunTrust's proposal. The bank's merger with First Union, inked in April, is proceeding on schedule and Wachovia's board has approved the transaction after an extensive review of all its options, the company said in a statement.

Charlotte, N.C.-based First Union said Monday that SunTrust's unsolicited takeover bid will not impact its merger with Wachovia

"We have a binding legal agreement with Wachovia that we intend to vigorously pursue to consummation," said First Union CEO Ken Thompson in a statement.† "We plan to continue the constructive merger integration dialogue which we've had over the past month and look forward to completing our merger with Wachovia."

Under the proposal, which SunTrust made in a letter to Wachovia's board of directors Monday, Wachovia holders would receive 1.081 shares of SunTrust common stock for each share. That would value Wachovia (WB: up $3.85 to $64.75, Research, Estimates) at $70.06 a share based on Friday's closing prices, a 17 percent premium over the First Union proposal.

SunTrust (STI: down $4.81 to $60.00, Research, Estimates) said it expects the deal would add to its earnings per share in the first year excluding one-time merger-related charges, and that it expects $500 million in annual cost savings after a planned three-year integration period.

Much of the savings would come from† cutting 4,000 jobs, or 8 percent of the combined work force, which SunTrust said is far less than the 7,000 jobs that would be lost under First Union's proposal.

Additionally, the combined companies would divest $1.5 billion of assets and would retain a proportionate number of key Wachovia managers on the new company's board of directors.

Wachovia's shareholders would own about 44 percent of the combined company compared with 30 percent of a combined Wachovia/First Union.

SunTrust, the nation's ninth largest bank, also said it would increase its annual dividend to $2.22 a share so that Wachovia shareholders would receive the same $2.40 a share dividend they currently receive.†

The combined company, headquartered in Atlanta, would control $180 billion in assets with more than 7.5 million customers. The firm would have leading positions in Georgia, South Carolina and Virginia. The SunTrust-Wachovia combination would have a wealth management business with $138 billion in assets under management.

The move comes about a month after First Union agreed to buy Wachovia in a deal that would create the No. 4 U.S. bank. That deal would yield annual cost savings of $890 million, the companies said then, resulting partly from about 7,000 job cuts. SunTrust also anticipates consolidating 150 to 175 branches out of a total 1,800, the company said in filing with the SEC Monday.

"We are delighted to propose this combination, which offers superior value to Wachovia's shareholders, and we are confident that the terms of Wachovia's merger agreement with First Union will allow Wachovia's board of directors to consider our proposal consistent with its fiduciary obligation to Wachovia shareholders," Humann said.

Pressure on Wachovia

SunTrust and Winston-Salem, N.C.-based Wachovia had engaged in merger discussions beginning back in November, according to a SunTrust filing with the SEC Monday. The two firms tentatively had set a Dec. 18 announcement date with the then merger agreement calling for SunTrust to pay 1.03 shares of its stock for each Wachovia share. The boards would have been even split between the two companies.

Wachovia CEO L.M. Baker would have been CEO until 2003 when SunTrust's Humann would assume the role.

On Dec. 14, the two companies called off the merger over differences in each firm's wealth management businesses. On April 14, days before Wachovia clinched a deal with First Union, SunTrust executives pitched their merger interests again to Wachovia without success. Wachovia accepted the First Union offer two days later.

"This puts Wachovia on the griddle," said analyst George Bicher of Deutsche Banc Alex. Brown Inc. "They have a better offer on the table which is sufficiently superior in terms of price and dividend and what it does for the organization."

First Union probably should not raise its $12.5 billion stock offer for Wachovia, Bicher said. At $12.5 billion in stock, the Wachovia acquisition is "good" for First Union but could turn very expensive it tries to match or outdo SunTrust.

SunTrust's shares dropped more than 7 percent Monday, trading around $60, after the deal was announced. However, shares were still significantly higher than First Union's, which were selling at around $30. First Union will now have to up its offer if it wants to remain in contention, analysts said.

"First Union doesn't have much of a currency to get into a bidding contest," Bicher said.

The acquisition would build SunTrust's market share in the fast growing Southeast market. However, it would not broaden SunTrust's investment banking capabilities in fund or brokerage products, Bicher said.

"You have a proven management team with SunTrust," analyst Chris Mutascio of Legg Mason said. "The currency of SunTrust is also stronger."

SunTrust probably will win the contest for Wachovia and First Union will walk away with a large breakup fee, probably more than $500 million, Bicher said.

"This will create one of the largest Southern banks," he said. "If Wachovia doesn't accept this offer, the shareholders are going to revolt."

The proposed purchase is subject to shareholder and regulatory approvals. -- from staff and wire reports